The Debt Controversy
The Funding Act appeared to make good business sense. Its supporters predicted that Virginia's payment of the interest and principal would encourage bankers and businessmen from outside the state to invest in Virginia and thereby help stimulate and revive its economy. However, the size of the debt was so large and the rate of interest so high that payment of the interest required more than half the annual revenue. Moreover, the Funding Act made the interest-bearing coupons on the bonds receivable for taxes, and every dollar paid in taxes with a coupon was a dollar that the state could not spend to run the government, support the new public school system, or even pay the interest. By 1872 Virginians paid about half the state revenue in coupons, and even though the General Assembly reduced the interest rate to 4 percent that year, during the remainder of the decade the state ran large budget deficits.
In 1872, the General Assembly also repealed the portion of the Funding Act that permitted people to pay taxes with coupons. The Virginia Supreme Court of Appeals ruled that the law was an unconstitutional impairment of the obligations of contract, although it later decided that the law did apply to coupon bonds issued after the assembly passed the March 1872 law.
In large part because of their perceived indifference to the public schools, which had been underfinanced almost from the beginning in 1871, Funders and Conservatives were on the defensive before the 1879 legislative election. Readjusters won majorities in both houses of the General Assembly that year, and in 1880 they passed a bill to reduce the rate of interest on the debt to 3 percent for fifty years and to repudiate about one-third of the principal that the Funding Act of 1871 had promised to pay. Holliday vetoed it, too, and in 1881 Readjuster candidates defeated Funder-Conservatives to win larger majorities in the General Assembly and all the statewide offices. Daniel was the Conservative candidate for governor and lost to Readjuster William E. Cameron.
With their majority, in 1882 Readjusters passed and Cameron signed a new funding act called the Riddleberger Act, after Harrison H. Riddleberger, a member of the Senate of Virginia from the Shenandoah Valley. It provided for fifty-year, 3-percent bonds to replace all the existing bonds, reduced the principal by about one-third, and prohibited payment of taxes with the bonds' interest-bearing coupons. At the same time, the assembly passed the first of numerous bills to prevent payment of taxes with coupons, which led to a long series of federal and state court cases about their constitutionality.
March 30, 1871 - The General Assembly passes "An Act to Provide for the Funding and Payment of the Public Debt," or the Funding Act of 1871.
March 1872 - The General Assembly repeals the portion of the Funding Act that permits people to pay taxes with coupons.
February 22, 1878 - The General Assembly passes what comes to be known as the Barbour Bill, after James Barbour. It requires that a portion of the state's tax revenue be collected in money and not in coupons in order that the money can be spent on the public schools. The governor vetoes it.
March 1, 1880 - The General Assembly passes a bill to reduce the rate of interest on the debt to 3 percent for fifty years and to repudiate about one-third of the principal. The governor vetoes it.
February 14, 1882 - The governor signs the Riddleberger Act, named after Harrison H. Riddleberger. It provides for fifty-year, 3-percent bonds on the debt, reduces the principal by about a third, and prohibits the payment of taxes with coupons.
Cite This Entry
- APA Citation:
Tarter, B. Funders. (2016, August 29). In Encyclopedia Virginia. Retrieved from http://www.EncyclopediaVirginia.org/Funders.
- MLA Citation:
Tarter, Brent. "Funders." Encyclopedia Virginia. Virginia Foundation for the Humanities, 29 Aug. 2016. Web. READ_DATE.
First published: October 31, 2014 | Last modified: August 29, 2016
Contributed by Brent Tarter, founding editor of the Dictionary of Virginia Biography.